CMN and BCB adopt measures to reduce the impacts of Covid-19 on the financial market

In order to mitigate the potential negative impacts of the new coronavirus (“Covid-19”) on financial and capital markets, the National Monetary Council (“CMN”) and the Central Bank of Brazil (“BCB”) have adopted a series of measures over the past few weeks. Among the implemented actions are the easing of certain daily and periodic obligations and regulatory requirements to which financial institutions and other institutions authorized to operate are subject to; the adoption of mechanisms to confer more liquidity to the market, aiming to encourage credit grant, and the extension of the instruments used by such institutions for fundraising.

The easing of daily and periodic obligations

In line with the recommendations and good practices of safety and public health disclosed by the competent authorities in Brazil and abroad, the BCB has adopted a series of measures to relax daily and periodic regulatory obligations to which financial institutions and other institutions authorized to operate are subject to, preserving essential services to the population:

•  Circular BCB No. 3,991 of March 19, 2020: eases face-to-face service to the public on the premises of financial institutions and other institutions authorized to operate by the BCB without the need to communicate any changes in advance. The measure should continue as long as there is a situation of risk to public health as a result of Covid-19, exempting banks and the Caixa Econômica Federal from complying with the mandatory and uninterrupted opening hours of their establishments that is under the Resolution CMN No. 2,932, March 19, 2002. According to the new rule, the guidelines for face-to-face service, including any special conditions, such as new opening hours or possible limitation on access, should be posted in a visible location on the premises of the institutions, as well as informed to customers through the other communication channels available;

• Circular BCB No. 4,017 of March 20, 2020: establishes the procedure that must be followed by financial institutions and other institutions authorized to operate, which regards to the forwarding of necessary documents for the instruction of claims before the Department of Organization of the Financial System (“DEORF”), in view of the temporary closure of physical protocols, maintaining only the digital protocol; and

• Circular BCB No. 3,995 of March 24, 2020: extends the deadlines for the submission of Brazilian Capital Declarations Abroad (“DCBE”) established in Circular BCB No. 3,624 of February 06, 2013, due to the difficulties that the declarants will have to gather the necessary information about their assets abroad because of the impacts caused by Covid-19, particularly due to the temporary closure of public and private services in Brazil and abroad. The annual DCBE is mandatory for individuals and legal entities resident, domiciled, or headquartered in Brazil that hold assets abroad worth equal to or greater than USD 100,000, on December 31 of each base year (“Annual DCBE”), and on quarterly bases for those who hold assets abroad worth equal to or greater than USD 100 million, on March 31, June 31, and September 30 of each base year (“Quarterly DCBE”). In this sense, the BCB extended the deadline for submitting the Annual DCBE, with a base date of December 31, 2019, from April 05 to June 1st, 2020; and the Quarterly DCBE with a base date of March 31, 2020, from June 05 for the time between June 15 and July 15, 2020.

Instruments for liquidity and credit grant

Among the measures adopted by the CMN and BCB to increase market liquidity and allow financial institutions and other institutions authorized to operate to have greater resources to keep their operations up and running, as well as to grant credit to third parties, according to the case, the following rules have been published:

• Circular BCB No. 3,990 of March 18, 2020: establishes the criteria and conditions for carrying out transactions in foreign currency, through which BCB can buy foreign government securities issued in Brazil (i.e. global bonds)  from financial institutions and with a discount of 10% in relation to their market value. Such transactions will be exclusively through foreign exchange dealers accredited by the public authority upon the signing of a term, in which they must agree with the conditions and criteria set by the BCB, such as the settlement within 2 working days and the repurchasing of the securities with the same characteristics within 30 calendar days as of the settlement, and new business transactions are allowed if previously agreed between the parties; and posting of margin, following the specifications of BCB, where the exposure of either party is equal to or greater than USD 500 thousand;

• CMN Resolution No. 4,782 of March 16, 2020: defines temporary criteria for the characterization of restructuring of credit transactions carried out until September 30, 2020 in order to maintain the flow of credit in the Brazilian economy and facilitate debt renegotiation, particularly involving micro, small, and medium enterprises, which are directly affected by Covid-19. According to the new rule, institutions are exempted from framing such renegotiations as problematic assets under CMN Resolution No. 4,557 of February 23, 2017, provided that they are not characterized as problematic assets on the date of publication of the new rule; and have individuals or legal entities with the financial capacity to honor the obligations as the other parties, considering the new agreed conditions. Consequently, the measure exempts institutions from increasing accruals for the renewal of transactions, allowing them to have more resources available to carry out restructuring processes and new credit transactions. Given the positive impacts of this measure on the economy, the CMN decided to extend this exemption to institutions falling within Segment 5 (S5), such as credit unions and fintechs, through CMN Resolution No. 4,791 of March 26, 2020;

• CMN Resolution No. 4,783 of March 16, 2020: provides for the percentage of a Capital Conservation Buffer (“ACPConservação”) to be applied in the amount of Risk-Weighted Assets (“RWA”). The ACPConservação is one of the 3 installments that make up the Capital Buffer established by CMN Resolution No. 4,193 of March 1st, 2013, in line with the recommendations of the Basel Committee for Banking Supervision, known as “Basel III”. According to this rule, since January 1st, 2019, the value of the ACPConservation installment should correspond to 2.5% of the RWA. Nevertheless, the new rule significantly reduced this percentage of application and proposed that its increase be carried out gradually, observing the following phases: 1.25% from 01 April 2020 to 31 March 2021; 1.625% from 01 April to 30 September 2021; 2% from 01 October 2021 to 31 March 2022; and 2,5% as of April 2022;

• CMN Resolution No. 4,784 of March 18, 2020: amends CMN Resolution No. 4,680 of July 31, 2018, which provides for the calculation of the Capital of Reference Equity, regulated by CMN Resolution No. 4,192 of March 01, 2013, to extend from December 31, 2019 to December 31, 2020, the period in which financial institutions authorized to operate by BCB may no longer deduct tax credits from recognized tax losses arising from a position sold in foreign currency for the purpose of hedging investments abroad; and extend by 1 year the deductibility schedule of such tax credits so that institutions can deduct at least 50% from 01 January to 30 June 2021 and 100% from 01 July until 31 December 2021;

• Circular BCB No. 3,993 of March 23, 2020: temporarily reduces the rate of compulsory collection on resources in installments established by Circular BCB No. 3,916 of November 22, 2018, from 25% to 17%. According to BCB, such a reduction will result in the release of BRL 68 billion to the economy and will be applied from March 30 to December 14, 2020, noting that the 25% rate should be replenished after that period;

• Resolution CMN No. 4,787, dated March 23, 2020: adjusts the basis of calculation of the allocation of resources collected through the issuance of Agribusiness Letters of Credit (LCA), easing the amounts directed to rural credit transactions to foster the granting of credit to the sector;

• CMN Resolution No. 4,788 of March 23, 2020: amends CMN Resolution No. 4,788 of March 23, 2020, to regulate the issuance of financial letters intended exclusively for the conduct of transactions with BCB to meet the liquidity needs of the issuing institution, which can be fully repurchased at any time; and increase the repurchase limit of subordinated financial letters issued by institutions falling within Segment 1 (S1) from 5% to 20%, contributing to the increase in securities liquidity; and

• CMN Resolution No. 4,792 of March 26, 2020: amends CMN Resolution No. 4,656 of April 26, 2018, to authorize direct credit companies to issue credit cards and finance transactions with resources from transfers from the Brazilian Development Bank (BNDES) and from the sale or assignment of credits to other types of investment funds — in addition to credit rights investment funds (FIDC) allowed until then — benefiting micro and small entrepreneurs who have little access to financial services.

Instruments for fundraising

Considering that the uncertainties caused by Covid-19 on the economy may negatively impact fundraising by financial institutions due to increased risk aversion, the CMN has issued the following rules aiming to ensure financial stability and the proper functioning of the market:

• CMN Resolution No. 4,785 of March 23, 2020: amends CMN Resolution No. 4,222, of May 23, 2013, to authorize financial institutions to collect resources through Installment Deposits with Special Collateral (DPGE1) of the Credit Guarantee Fund (FGC) up to the limit of BRL 20 million per holder, an instrument that already was successfully used by BCB to provide liquidity to the market in the context of the 2008 global crisis. According to the new rule, DPGE1 must have the following characteristics: minimum issuance value of BRL 1 million; minimum term of 12 months and maximum of 24 months, being early redemption prohibited; the possibility of fundraising equivalently to the institution’s equity, limited to BRL 2 billion per conglomerate; and the need to collect monthly contribution to the FGC equivalent to 0.03% or 0.02% of the collected balance, observed that the latter percentage will be applicable to institutions that offer counter-guarantees to the FGC (DPGE2) through the assignment of fiduciary ownership of receivables of credit transactions and market leases by them originated. In addition, the new rule extends the date of incidence of pulverized fundraising (i.e. up to BRL5,000) in the calculation of the Additional Contribution paid by institutions associated with the FGC to July 1st, 2021; and

• CMN Resolution No. 4,786 of March 23, 2020: authorizes BCB to grant financial institutions a Special Temporary Liquidity Line (LTEL) backed by debentures that meet certain requirements, as well as compulsory collections in an amount equivalent to the transaction, in order to provide liquidity to the secondary market of private debt and thus contain the adverse effects caused by Covid-19 on the capital markets. In this sense, according to some news released on the subject, LTEL will release BRL 91 billion for banks and Caixa Econômica Federal, provided that they are holders of “Bank Reserves” accounts with BCB. On the same date, Circular BCB No. 3,994 was published to regulate the Resolution, detailing the contractual conditions and procedures necessary for the formalization of transactions and mobilization of the respective collateral. The rule provides criteria for membership of LTEL, financial charges for transactions, parameters for acceptance of collateral, price of assets, concentration index by the issuer, discounts and financial limits, payment and financial settlement, and release and recomposition of collateral. The institutions indicated will be able to obtain loans under LTEL from 6 to 30 April 2020 and transactions will last for 125 working days, which can be extended for the same period at the BCB’s discretion.

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